Reno, Nevada’s Housing Shortage — How Bad Is It?

Each month the Reno-Sparks Association of REALTORS^® releases its Housing Market Report for the greater Reno/Sparks area. And each month it’s reported that “The Reno market is a seller’s market, at [insert very low number here] months supply of inventory.” For much of the year, that low number has been below 2 months supply. (See table below.)

Months Supply of Inventory

Month	MSI
April 2017	1.9
May 2017	1.4
June 2017	1.4
July 2017	1.6
August 2017	1.5
September 2017	1.7
October 2017	1.7
November 2017	2.0

These numbers, while striking, are big picture numbers for the entire Reno and Sparks housing market. Alone they don’t tell the whole story. Today, we’re going to dive deeper into Reno-Sparks’ “months supply of inventory” to see just how tight inventory really is. But first let’s explain the metric.

Months Supply of Inventory

Simply put, months supply of inventory, or MSI, is the time it would take to exhaust the active inventory at the current rate of sales. In other words, in the absence of any other new inventory entering the market, how long would the current supply of houses available for sale last?

For example, if there are 50 houses for sale, and houses are selling at 5 per month, it would take 10 months to exhaust the supply. So, this market scenario would be described as having a 10 months supply of inventory. …And would be described as a “buyer’s market”.

Buyer’s market vs. Seller’s market

Local real estate markets are typically described as Buyer’s, Seller’s, or Balanced markets. A buyer’s market is one in which the supply of houses substanitally exceeds the demand for those houses. Such a scenario gives home buyers some leverage over sellers in price negotiations.

A seller’s market, on the other hand, is one in which the supply of houses is substantially less than homebuyer demand for homes. This scenario gives the home sellers leverage over the buyers in price negotiations.

A “balanced market” (also known as a neutral market) is one where buyer demand and seller inventory are at an equilibrium — neither side has substantial leverage over the other. The wide consensus among real estate practitioners and economists is that a balanced market is established when the months supply of inventory falls in the range of 4 – 6 MSI.

So, to recap…

• > 6 MSI is a buyers market
• 4 – 6 MSI is a balanced
• < 4 MSI is a sellers market

Reno’s Seller’s Market

In calculating MSI, only Active (non-Pending) listings are counted for inventory. That’s because listings that are already under contract and pending are realistically unavailable for purchase. Referring to the table at the top, the Reno-Sparks’ MSI numbers clearly indicate a seller’s market — in fact, an extreme seller’s market.

This low MSI level is the major factor driving increases in home prices. In my November market analysis I reported that “November’s median sales price [of $355,000] for homes sold in Reno and Sparks, Nevada increased 2.7 percent over October’s median of $345,500; and is now up a whopping 14.5 percent year-over-year.”

Below is a chart showing the last 12 months of median sales prices for Reno and Sparks, Nevada.

Our market’s current median sales price of $355,000 is only off 2.7 percent from the all-time record high of $365,000 set at the peak of the housing bubble in January 2006.

Diving Deeper

As I mentioned above, the monthly MSI number reported is an overall number for the entire Reno-Sparks housing market. The number encompasses available inventory and monthly sales at all price points. An interesting picture emerges when we drill down a bit deeper.

As of November there were 783 active listings (houses available for purchase) in Reno and Sparks. (See chart below.)

If we breakout these listings by various price points, we see how the available inventory is distributed by price range. (See chart below.)

For example, in the chart above we see that there is only one house available that is priced under $150,000. There are five houses priced between $150,000 and $199,999; 28 listings priced between $200,000 and $249,999; and so on.

As the chart above also shows, the vast majority of the housing inventory is priced at the higher price points.

But the majority of homebuyers in Sparks and Reno, Nev. are looking to purchase homes in the lower price ranges. There were 519 homes sold in November. The chart below shows how these November sales were distributed across price points.

The chart above depicts a bell curve with the $300,000 – $399,999 price range as having the greatest number of home sales — at 176 units sold. This is not surprising, as our market’s current median sales price is $355,000.

Recalculating MSI using the inventory and sales numbers across the price points shown in the charts above yields a more telling picture of the housing inventory in Reno and Sparks.

The chart above shows the current months supply of inventory (MSI) by price range. The red line marks 5 MSI, or a balanced market. Those price ranges exhibiting MSIs that fall below the read line are in the seller’s market territory. The farther below the red line, the more extreme the seller’s market.

As can be seen, at the price points below $300,000, inventory supply can be measured in days rather than months. At the $300K – $399K range only 1 MSI exists. At the $400K – $499K range only 1.8 MSI is currently available. Even the $500K – $749K range is a seller’s market — with only 2 MSI.

It’s not until we reach the $750,000 and above price range that a balanced market emerges. But only 7 percent of buyers are shopping in that range (refer to the Numbers Sold by Price Range chart above). That means that roughly 93 percent of buyers are dealing with extreme seller market conditions.

These conditions create a very challenging environment for home buyers. Commonly seen scenarios include: encountering multiple offers situations; bidding wars; properties selling for above asking price; contingent offers being less desirable; sellers concessions occurring less frequently; and more.

I saw a sign at a sales office last week which read, “The house you saw today and want to think about tonight will sell today to the people who saw it yesterday and thought about it last night.” So true right now.

These conditions also impact home sellers. Homeowners who would like to list and sell their homes are holding back because they do not want to become a buyer in today’s challenging market. And with this source of potential new inventory not coming to market, the inventory problem worsens.

What lies ahead?

Unfortunately, I see more of the same market conditions for the foreseeable future — that is, low inventory and increasing prices. In fact, with buyer demand projected to only increase, the issues discussed above will only worsen. Simply perform a web search on “reno housing shortage” and take a look at the dozens of stories that come up. [Seriously, do it. You’ll be amazed.]

A local News4 piece last week quoted Mike Kazmierski, President of the Economic Development Authority of Western Nevada (EDAWN), as saying:

The region needs 6,000 new housing units per year to keep up with demand and get itself out of its current housing hole. That goal is not being met.
Since the recession, the most new housing construction the region has seen in a single year is nearly 3,600 units. This year could the best year at about 4,500.

Even with the optimistic projection of 4,500 new units annually, that still leaves a annual shortage of 1,500 homes in the region. And that’s not even taking into consideration the question of new home affordability. In other words, will new homes be priced at a price point that first-time home buyers and median income households can afford?

To answer that question, I hope to gather some information at next month’s “Forecast 2018 and Beyond” event presented by The Builders Association of Northern Nevada. This annual event will forecast the local residential and commercial real estate markets for the coming year. On the residential side, both resale and new home projections will be presented. I will be listening intently. I’ll let you know, what I learn. [Btw, If you would like to attend, tickets can be found here.]

As always, thank you for reading and comments are welcome.

Note: The data presented above covers the cities of Reno, Nevada and Sparks, Nevada [NNRMLS Area #100]. Residential data includes Site/Stick Built properties only. Data excludes Condo/Townhouse, Manufactured/Modular and Shared Ownership properties. Data and charts courtesy of the Northern Nevada Regional MLS – December 21, 2017. Note: This information is deemed reliable, but not guaranteed.

Follow-up post: Want to Buy a House in Reno-Sparks Built in the Last Ten Years? You’ll Need Half a Million